Trumps G20 summit - APAC brief 3 Dec

Trump’s G20 Summit: Love him or loathe him, Donald Trump seems to be able to get things done. Given he is the most powerful man in the word – at the very least, in a political sense – perhaps this isn’t such a difficult task. When you have the world’s largest economy, coupled with the world’s most potent military at your disposal, one would have all the leverage needed to get their way. But nevertheless, arguably not since Ronald Reagan has global politics experienced such a rapid ideological shift. There were plenty of little-stories, centring around a myriad of economic and political issues, that were played out at the weekend’s G20 summit. The overarching narrative however, at what was possibly the most historically significant G20 meeting since 2009 – when world leaders gathered to discuss the global economy at the depths of the Global Financial Crisis – was about the pitfalls of global trade and migration, and it had President Trump written all over it.

Typical talk-fest: As generally occurs at these talk-fests, this year’s G20 summit was apparently characterized by the typical jostling and lobbying between the many tiers of power. What happens behind closed doors seemingly stays behind closed doors (it’s hardly surprising the masses treat these engagements with cynicism, if not outright paranoia), so it’s difficult to know the depth of discussion shared by world leaders. What we do get though is a nice little communique at the end of it all, summarizing the broad, shared vision of the member countries, with some normative statements articulating how the world ought to approach itself in the future. The short-term financial market implications of this year’s statement will presumably be limited, and more focused on (somewhat improving) US-Sino relations. Regardless, for those with a concern for the structural matters directing future financial and economic activity, an appreciation of what was spoken over the weekend gives a keyhole insight into what can be expected in tomorrow’s world.

Trumpian philosophy wins: True to Trump’s historic influence, the financial and economic world of tomorrow, if the G20’s communique is a reliable indicator, is one of greater nationalism, higher trade-barriers, and less liberal movement of people. For the first time in its (albeit short) history, the G20 avoided disavowing protectionism, and instead stated that the world trade system is “falling short of its objectives and there is room for improvement”. It pointed out, too, the necessity of institutional reform, naming and shaming the World Trade Organisation as a body failing to meet its mandate, and calling on supranational bodies to do more to ensure fairness in the global economy. Ultimately, the culmination of many days of talks lead to an implied (and what can probably be judged a reluctant, at least for most member-states) rebuke of globalisation, and the liberal democratic order that grew out of the post-World War II world.

A New World Order? Although the reactionary face of this growing impulse of isolationism, nationalism and protectionism in parts of the global political stage possesses the fake-tanned ugliness of US President Donald Trump, some of the genuine criticisms relating to the liberal politico-economic order ought to be treated with some credibility. The virtues of free-trade, liberalization, globalization and the like haven’t always been lived-up to by world leaders, who sometimes have appeared to bastardize the system to preserve the special interests of those who exploit the system. Not only that, in a practical sense, trade-barriers, high borders, and the unequal treatment of certain nations have always existed in some sense, despite the pontificating of world leaders about the benefits of multilateralism, freeness and fairness of the liberal order. It may not ultimately be true that internationalism and institutionalism is undesirable, however whatever the truth, the perception amongst many is that the system is corruptible, ineffective, opaque and (dare it be said) “fake”.

Realism reigns: It’s where the brutal appeal of realist politics – which is exemplified today by Trump, Brexit and other forms of “populism” – takes its hold. It harks back to a notion (an old cliché, really) spouted famously by Paul Keating, channelling his mentor Jack Lang: “In the race of life, always back self-interest: at least you know it’s trying.” Such a brutal, Machiavellian view of the world, if delved into, especially too deeply, is highly disturbing – almost misanthropic. Though for all its base savagery, the idea does seem self-evidently true, and fundamentally real. It isn’t as if such extreme real politick ever truly disappeared as the liberal-democratic global order, and the global economy it produced, emerged and flourished. Ostensibly, it was always there in come capacity, moving the gears of history in one way or another. The difference now – in a time of social crisis, apparently defined by “fake news” and “alternative facts – is that extreme self-interest can be understood, trusted, openly embraced, and even lionized.

Trade-truce to be the focus: In the end, evening if begrudgingly, this system – epitomized by serving the (collective and individual) self at the expense of all others – was tacitly endorsed by G20’s communique, paving the way for meaningful, structural change in the global economy. The potential impacts of this are unlikely to manifest in notoriously short-termist financial markets: whatever the effects, they will be considered and experienced some way down the road. Traders will search for information in the next 24 hours that influence the here and now – and given that the summit appeared to go ahead cooperatively, it ought to be presumed a bullish sentiment will reign across markets. The primary reason this may prove true is that at the coda of the event, the highly anticipated dinner between US President Trump and Chinese President Xi Jinping reportedly went along well, with both trade war combatants appearing cordial, and agreeing in principle to halt new tariffs on one another’s countries for at least 90 days.

Possible price reaction: This being so, risk appetite may well be piqued today, and risk assets could be poised to rally. The last price of SPI Futures have the ASX200 up 25 basis points, having shed a remarkable 1.6 per cent on Friday to close at 5667. Asian equities will surely be beneficiaries today, however considering the major ramifications of the weekend’s events, indices throughout Europe and North America stand to gain, too. Growth currencies like the Australian Dollar and New Zealand Dollar may climb, with the A-Dollar eyeing minor resistance at 0.7360 – a break of which could enable a run to 0.7430. The risk-on tone, combined with a fall in US Treasury yields across the curve, will probably produce a weaker greenback – with other havens in the form of CHF and JPY likely to experience the same. While in commodities prices, notably precious and base metals, should move higher, though it must be stated oil specifically will likely track its own idiosyncratic trading-patterns.

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The AUD continues to trade lower following the Chinese ban of Australian coal to its Dalian port. The ASX has benefited for the weaker exchange rate as it is trading at its highest level since October.

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Wall Street pulls back: On balance, and with Wall Street a few hours from ending its session, it's been a soft 24 hours for equities. The often heard calls of a looming "new-peak" in the market in the shorter term can be heard from some. Momentum has certainly slowed down. The S&P500 has its eyes one 2815 again - that crucial area where that index sold off on three occasions from October to December last year. It could be a slow drive to arrive at a challenge of that level now. The dovish Fed will keep the wind behind US stocks; but the earnings outlook, post reporting season, has dimmed on Wall Street, while positive regarding the trade war has already been heavily juiced.

Trade war truce already priced in? Markets are positioned for a relatively positive outcome in the trade-war, and that's manifesting in pockets of market activity. A true resolution in the trade war isn't expected, however an extension to be March 1 trade-truce-deadline seems to be. The overnight fall in US Treasuries, coupled with a topside break of copper's recent range, is a testament to this sentiment. The yield on the US 10 Year note has jumped back towards 2.70 percent, while the 3 month copper contract on the LME leapt another 0.83 per cent overnight. In G4 currencies, the US Dollar is stronger against the Euro and Pound, albeit very, very marginally, but weaker against the Yen.

The curious case of gold: Gold prices have dipped slightly courtesy of the stronger Dollar and greater confidence in the policy-outlook for the world's major central banks. The price of the yellow metal is sitting just above $1325 presently, as it continues its short term trend higher. One of the more divisive debates amongst traders currently is the outlook for gold. Like any market, time horizons are crucial to illustrating the trend for an asset's price.

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